Philip Morris International Inc. — Q3 2012 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2012, compared with the corresponding 2011 periods. PMI manufactures and sells tobacco products in markets outside the United States.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net revenues, including excise taxes | $19.592bn | $20.706bn | $57.651bn | $57.470bn |
| Net revenues excluding excise taxes | $7.920bn | $8.362bn | $23.488bn | $23.426bn |
| Operating income | $3.623bn | $3.677bn | $10.630bn | $10.396bn |
| Net earnings attributable to PMI | $2.227bn | $2.377bn | $6.705bn | $6.705bn |
| Diluted EPS | $1.32 | $1.35 | $3.92 | $3.76 |
| Operating cash flow | Not separately presented | Not separately presented | $7.771bn | $9.568bn |
- Q3 reported revenue fell 5.4%; revenue excluding excise taxes fell 5.3%. Currency reduced the latter by $731 million, while pricing added $505 million. Operating income declined 1.5%, as pricing was outweighed by unfavorable currency and volume/mix.
- For the nine months, reported revenue rose 0.3%, and revenue excluding excise taxes rose 0.3%. Currency reduced revenue excluding excise taxes by $1.2 billion; $1.3 billion in price increases largely offset that impact. Operating income increased 2.3%.
- Q3 PMI-attributable earnings decreased 6.3%; nine-month attributable earnings were unchanged. Nine-month EPS rose 4.3%, supported by fewer shares following repurchases; unfavorable currency reduced EPS by $0.19.
- Nine-month cash flow from operations fell $1.8 billion, mainly due to currency and higher working-capital needs, including inventory replenishment and tax-related inventory timing. Capital expenditures were $719 million, versus $568 million a year earlier.
- At September 30, cash was $4.817 billion and total debt was approximately $22.4 billion, up from $18.5 billion at year-end 2011. Total liabilities were $38.193 billion; stockholders’ equity was a deficit of $1.160 billion, reflecting substantial repurchases and dividends.
- PMI had $6.0 billion of committed credit facilities, none drawn; commercial paper outstanding was $1.6 billion. Its covenant EBITDA-to-interest ratio was 16.1x against a 3.5x minimum. The filing states operating cash flow, commercial paper and committed facilities support liquidity needs.
Material changes and operating trends
- Nine-month cigarette shipments increased 0.8% to 693.9 billion units; excluding acquisitions, volume rose 0.7%, or 1.7% excluding the prior-year Japan shipment comparison. Q3 cigarette volume declined 1.3%; combined cigarette and other tobacco product volume fell 1.0%.
- Nine-month regional operating companies income increased in Eastern Europe, Middle East & Africa (13.0%) and Asia (7.1%), but declined in the European Union (8.9%) and Latin America & Canada (2.7%). In Q3, EEMA rose 13.2% and Latin America & Canada rose 4.7%; EU fell 14.0% and Asia fell 0.9%.
- EU weakness reflected shrinking cigarette markets, economic pressures, tax-driven pricing and illicit trade. Growth in EEMA and Asia was supported by pricing and selected market-share gains. Japan comparisons were affected by unusual distributor inventory rebuilding in 2011.
- Debt increased through new borrowing. PMI issued debt in U.S. dollars, euros and Swiss francs during the first nine months; proceeds supported working capital, repurchases, refinancing and general corporate purposes.
- PMI completed its prior $12 billion repurchase program in July and began a new three-year $18 billion program in August. It repurchased $4.5 billion of shares in the first nine months. The quarterly dividend was increased 10.4% to $0.85 per share; the annualized rate was $3.40.
Outlook, commentary and risks
- On October 18, 2012, PMI narrowed its full-year reported diluted EPS forecast to $5.12–$5.18, compared with $4.85 in 2011. It cited forecast unfavorable currency of approximately $0.23 per share, a $0.05-per-share tax item and asset impairment and exit costs. Excluding specified items, management projected approximately 11%–12% growth versus adjusted 2011 EPS. The adjusted measure is non-GAAP.
- Management expected to achieve its 1% mid-to-long-term organic annual volume growth target for 2012. Forecasts exclude potential acquisitions, unanticipated impairment or exit costs and unusual events, and remain subject to the filing’s stated risks.
- PMI is developing next-generation products intended to reduce harm. It anticipated €500–€600 million ($651–$781 million) of capital spending over three years for production capacity, with a first factory expected ready by 2016 and initial market launches targeted for 2016–2017. Commercialization and reduced-harm claims depend on development and regulatory approval.
- Principal risks include higher excise taxes, tighter tobacco regulation and packaging restrictions, declining consumption, downtrading, illicit trade, competition, foreign exchange exposure and agricultural supply costs. The filing highlights Australia’s plain-packaging rules and related proceedings, proposed EU measures, and Brazil’s ingredient restrictions.
- Litigation remains a material uncertainty. PMI said it had not concluded a loss was probable or estimable for pending tobacco-related cases and had accrued no estimated loss for them. Some claims seek very large damages. The filing also describes Thai investigations alleging approximately $2.0 billion of duties and taxes for 2003–2007 and an informal inquiry involving approximately $1.8 billion for 2000–2003; the prosecution decision in the former matter was under review.
- Other notable items: a $79 million additional tax provision followed the conclusion of an IRS examination of Altria’s 2004–2006 consolidated returns; nine-month asset impairment and exit costs were $50 million. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether full-year EPS guidance and the 1% organic volume target were achieved, and how currency and tax items affected results.
- How cash generation, working capital, capital spending, debt and share repurchases evolved after September 30, 2012.
- Whether EU market contraction, pricing, illicit trade and the performance of Asia and EEMA continued to shape segment profitability.
- Developments in major tobacco litigation and the Thai tax/customs investigations, including any change in the likelihood or estimability of losses.
- Regulatory developments affecting plain packaging, ingredients and product marketing, and the timing, cost and approval prospects for next-generation products.